Baxter International Inc.

Good morning, ladies and gentlemen, and welcome to the Baxter International's first quarter 2021 earnings conference call. Your lines will remain in the listen-only mode and to the question and answer segment of today's call. At that time, if you have a question, you will need to press star then 1 on your touchtone phone. If anyone should require any assistance during the conference, please press star then 0 on your touchtone phone. As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time. I would now like to turn the call over to Ms. Claire Trackman, Vice President, Investor Relations at Baxter International. Ms. Trackman, you may begin.

Good morning and welcome to our first quarter 2021 earnings conference call. Joining me today are Joe Almeida, Baxter's Chairman and Chief Executive Officer, and Jay Saccaro, Baxter's Chief Financial Officer. On the call this morning, we will be discussing Baxter's first quarter 2021 financial results and full year 2021 financial outlook. Please note, starting this quarter, the financial schedule, which breaks out sales by key product categories, will now include the sales of our biopharma solutions contract manufacturing unit. Historical schedules reflecting this new structure, along with a supplemental presentation to complement this morning's discussion, can be accessed on our website in the investor section under events and news. This presentation includes related non-GAAP reconciliations. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the second quarter and full year 2021, new product developments, business development, and regulatory matters contain forward-looking statements that involve risks and uncertainties. And of course, our actual results could differ materially from our current expectations. Please refer to today's press release and our SEC filings for more detail concerning factors that could cause actual results to differ materially. In addition, on today's call, non-GAAP financial measures will be used to help investors understand factors ongoing business performance. A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available on our website. As mentioned in our press release this morning, during the first quarter, Baxter strengthened its European and global pharmaceuticals portfolio with the acquisition of the rights for certain territories outside the U.S. to the widely prescribed chemotherapy medication Calix, also known as Doxil in several geographies, including the U.S. This strategic acquisition, which closed on February 17th of this year, supplements factors previously existing U.S. rights to Doxil, which the company acquired in 2019. As a result of this acquisition, on the call this morning, we will be discussing operational sales growth, which adjusts for the impact of foreign exchange, as well as the international sales of Halix and Doxil. Now I'd like to turn the call over to Joe. Joe?

Thank you, Claire. Good morning, everyone, and thank you for joining today's call. I hope that you and your loved ones are healthy and safe. I'll begin with an overview of Baxter's first quarter performance. Jay will take a closer look at the financials, including our outlook for Q2 and the year as a whole. Then we'll close with Q&A. Baxter delivered first quarter sales growth of 5% on a reported basis and 1% on both a constant currency and operational basis. This represents solid performance in the face of an unprecedented pandemic, as well as a challenging year-over-year comparison, given the heightened sales we experienced a year ago as our customers prepared for the impact of COVID-19. On the bottom line, first quarter adjusted earnings per share of 76 cents declined 7%. This decrease reflects the negative year-over-year impact of COVID on our results in the quarter. On a segment basis, Asia-Pacific delivered growth of 8% at constant rates. This growth reflects the strength across the region, while much of the region is progressing in its recovery. We continue to monitor the situation in India, which is experiencing the highest COVID infection rates around the world. Sales results in the MEA were flat year over year and declined 1% in the Americas, also at constant currency rates. Sales in both of these segments continue to be impacted by lower rates of hospital admissions and surgical volumes due to the pandemic. Looking at performance by business. acute therapies led growth across all of our product categories with sales increasing 28% on a constant currency basis. Results were driven by ongoing heightened demand globally for Baxos continuous renal replacement therapy or CRT technology amid COVID-19. As we discussed last year, we expect acute therapies demand to recede from its pandemic peak and return to more typical levels over the course of the year. Our biopharma solutions business advanced 11% year-over-year on a constant currency basis, driven by our partnerships to assist in manufacturing the COVID-19 vaccines. Renal care, clinical nutrition, pharmaceuticals all grew at low single digits, a constant currency. Growth in renal care continues to be driven by demand for our peritoneal dialysis or PD products globally. I would point out that demand for both our e-center, HD, and PD businesses has been dampened by depressed patient volumes driven by higher mortality rates for ESRD patients in the wake of the pandemic. We expect ESRD patient volumes to stabilize and return to normal over the next 18 to 24 months, but the pace of their recovery may vary by market. PD growth is expected to continue outpacing HD growth market-wide for the foreseeable future. Beyond the general lifestyle benefits of home-based PD, this therapy continues to be recognized as a viral treatment option amid pandemic conditions. In addition, the new CMS End-Stage Renal Disease Treatment Choices, or ETC, payment model went into effect in the U.S. at the start of the year, which supports expanded access to home therapies. HD will remain a critical treatment option in numerous markets. As a pioneering dialysis broadly, Baxter is committed to innovation across both modalities, enabling clinicians and patients to make the right treatment choices based on their distinct needs. Last quarter, I highlighted the FDA's five-pancake clearance of our home-choice CARA APD cycler as one more way we are supporting PD growth in the U.S. More recently, we received 510K clearance of our leading-edge AK98 hemodialysis system, a proven platform that is currently used in more than 90 countries worldwide and now launching in the U.S. Growth in our clinical nutrition business reflected demand for Baxter's multi-chamber nutritional product offerings in the U.S. and APEC markets, as well as nutrition compound growth in EMEA. Pharmaceuticals growth was driven by continued strength in our international pharmacy compound business as well as the benefit from the recent acquisition of Calix Doxil rights in selected territories outside the U.S. This acquisition further strengthens our pharmaceutical support for the global and in particular represents a platform to accelerate growth in Europe. Adjusting for the Calix and Doxil acquisitions and foreign exchange, pharmaceuticals declined low single digits year over year. Performance in the quarter reflects the challenge in comparison to the prior year quarter, which occurred before a marked decline in hospitalizations and surgical volumes due to the pandemic, intended with heightened sales as hospitals stocked up on few supplies as the pandemic emerged. Medication delivery and advanced surgery both declined mid-single digits as constant currency rates as these businesses were also impacted by lower rates of hospitalizations and surgical procedures, as well as the challenge in comparison to the prior year quarter. That said, we're seeing gradual steady recovery in these trends. I expect this to continue over the course of the year, particularly as the rate of COVID vaccinations improves globally. In medication delivery, we are also excited by the potential of our NovumIQ infusion platform, including our DoseIQ safety software and IQ Enterprise digital connectivity suite. NovumIQ was resubmitted for FDA 510K clearance earlier this month. We look forward to advancing this application and anticipate introducing this exciting technology to the U.S. in the second half of this year. We also remain committed to broadening our presence globally for Novo MyQ and currently expect to introduce this platform in Europe in 2022 as we work to enhance our product offering to address the specific needs of this region. As I wrap up, I would like to reinforce that Baxter is both well-prepared and well-positioned for the future. The essential nature and durability of our portfolio, the breadth and diversity of our product lines, our expansive geographic footprint, and the impact of our transformation all taken together fuel our resilience, adaptability, and agility. We remain focused on advancing innovation, the key to sustained growth in any industry. We have a lot to look forward to across our businesses, including new therapeutics and increasingly new value-added digital solutions. You may hear about many of these at our upcoming investor conference and some even sooner. And to supplement our organic pipeline, we will continue to pursue attractive BV opportunities in our core portfolio and key adjacencies, as well as complement our businesses. and our 50,000 employees remain absolutely dedicated to advancing our mission for patients, and we are committed, as ever, to returning value to our shareholders. Now, I'll pass it to Jay for a deeper dive into our financials and outlook.

Thanks, Joe, and good morning, everyone. As Joe mentioned, we're pleased with our first quarter performance, particularly in light of the ongoing pandemic conditions and the tough comparison to first quarter 2020, where we experienced heightened demand for select products as COVID-19 began to spread to the U.S. and other geographies. The strength and resilience of our portfolio continues to be on display when we are executing on the priorities we've set out. As Joe mentioned, this quarter we resubmitted the FDA 510K filing for Novum IQ. Our suite of next-generation infusion pumps is a promising multiyear growth driver for Baxter. Additionally, in line with our strategic objective, we bolstered our pharmaceuticals portfolio with the acquisition of rights to select territories outside the U.S. that will allow for future growth, particularly in our EMEA region. And we continue to execute on recent new product launches across our businesses and geographies. Turning to our first quarter 2021 results, global sales of $2.9 billion advanced 5% on a reported basis, 1% on a constant currency basis, and 1% on an operational basis. For the quarter, we estimate that COVID negatively impacted year-over-year sales growth by approximately 400 basis points. Sales growth in the first quarter did exceed our expectations driven by operational strength and the benefit from COVID vaccine manufacturing-related revenues. Also, the recent acquisition of Calix Doxil contributed approximately 45 basis points to growth in the quarter. On the bottom line, adjusted earnings declined 7% to 76 cents per share as a negative impact from COVID on our business and operations, as well as increased interest expense and a higher tax rate more than offset operational growth in the quarter. Now, I'll walk through performance by our regional segments and key product categories, starting with our three regional segments. Sales in the Americas declined 1% on both a constant currency and operational basis. Sales in Europe, Middle East, and Africa were flat on a constant currency basis and declined 1% on an operational basis. And sales in our APAC region advance 8% on both a constant currency and operational basis. Moving on to performance by key product category, note for this quarter, constant currency growth is equal to operational sales growth for all global businesses, with the exception of our pharmaceuticals business, for which we will provide both constant currency and operational growth, adjusting for the acquisition of rights in select territories outside the U.S. for Kalex Doxil. Global sales for Renal Care were $922 million, advancing 2% on a constant currency basis, Performance in the quarter was driven by global growth in our PD business. We continue to monitor the impact of excess mortality among ESRD patients and delays in new patient diagnoses resulting from the pandemic. This is particularly notable in select Latin American markets, which saw patient volumes decline mid-teens during the quarter. Our current expectation is for PD patient volumes to ramp over the course of the year, although as Joe mentioned, the pace of recovery will vary by market and be further impacted by the rate of COVID vaccinations. Longer term, we remain excited about the trajectory for our renal care business, in particular with our leading portfolio of home therapies. Sales and medication delivery of $652 million declined 6% on a constant currency basis, The sales decline reflects a difficult comparison to the first quarter 2020, where we experienced heightened demand for certain medication delivery products and hadn't yet felt the full impact from the lower rate of hospital admissions and surgical procedures. During the quarter, we estimate that U.S. hospital admissions were down high single digits as compared to pre-COVID levels. Pharmaceutical sales at $552 million advanced 1% on a constant currency basis and declined 2% on an operational basis. OUS sales of Calix Doxil contributed approximately $13 million to the quarter. Pharmaceutical performance in the quarter was also negatively impacted by the Q1 2020 pre-pandemic buy-in for select products, as well as lower rates of hospital admissions and surgical volumes, with sales of both inhaled anesthetics and specialty injectables declining high single digits, excluding the benefit of the Calix Doxil acquisition. Strength in our international pharmacy compounding services partially offset this impact. Moving to nutrition, total sales were $234 million, increasing 3% on a constant currency basis. Performance in the quarter was driven by increased demand for multi-chamber bags and nutrition compounding products in EMEA. Sales in advanced surgery were $217 million, declining 6% on a constant currency basis. Sales within the quarter were impacted by lower surgical procedure volumes, as well as a difficult year-over-year comparison, as the first quarter of 2020 included a benefit of approximately 600 basis points, resulting from competitor product shortages. Although surgical procedures experience a slow start to the year, we expect quarterly sequential improvement and anticipate ending the year with procedure volumes approximately flat to pre-COVID levels. Sales in our acute therapies business were $207 million, representing growth of 28% on a constant currency basis, driven by ongoing COVID-related demand. As Joe mentioned, we anticipate this demand will slow as vaccination rates increase and COVID-related admissions declined. As mentioned, beginning this quarter, we are disclosing sales associated with our biopharma solutions contract manufacturing unit, which was previously presented in our other category. First quarter sales in biopharma solutions were $135 million, representing growth of 11% on a constant currency basis. Performance in the quarter was driven by revenues generated from manufacturing COVID-19 vaccines on a contract basis. we are honored to play a role in helping meet global demand for COVID-19 vaccines. Moving through the rest of the P&L, our adjusted gross margin of 42% declined by 230 basis points over the prior year, driven by lower sales of high margin products and increased operations and supply chain expenses resulting from COVID. Adjusted SG&A of 609 million increased 3% on a year-over-year basis and was flat on a constant currency basis. Adjusted R&D spending in the quarter of $128 million increased 4% on a reported basis and was also flat on a constant currency basis. Both adjusted SG&A and R&D reflected continued benefit from lower discretionary spending amid the pandemic. The adjusted operating margin in the quarter was 17%, a decrease of 180 basis points versus the prior year. Net interest expense was $34 million in the quarter, an increase of $13 million compared to the prior year, driven by increased interest expense from higher outstanding debt balances, as well as decreased interest income due to lower interest rates. Other non-operating expense totaled $5 million in the quarter. The adjusted tax rate in the quarter was 16% and was favorable to our expectations, driven primarily by a discrete tax benefit recognized in the quarter. We had expected this benefit to occur later in the year. Let me conclude my comments by discussing our outlook for the second quarter and full year 2021. For full year 2021, we expect global sales growth of 8% to 9% on a reported basis, 5% to 6% on a constant currency basis, and 4% to 5% on an operational basis. This assumes a benefit of approximately 100 basis points to both reported and constant currency revenue growth for the acquisition of Calix Doxil, as well as approximately 300 basis points of positive top-line impact from foreign exchange on reported growth. Our expectation remains that on a full-year basis, hospital admission rates and surgical procedures will stay below pre-COVID levels with rates improving throughout the year and exiting the fourth quarter with admissions down low single digits and procedures roughly flat. Moving down to P&L, we now anticipate adjusted operating margin to expand between 40 to 60 basis points, reflecting the strong first quarter performance and the inclusion of the Calix Docile OUS rights. We expect this benefit to be partially offset by increased supply chain and manufacturing-related costs given the increase in commodity pricing and freight transport, as well as a negative impact from foreign exchange. For the year, we expect an average adjusted tax rate of approximately 18% and a full year diluted average share count between the range of 510 million to 515 million shares. Based on these factors, we expect 2021 adjusted earnings, excluding special items, of $3.47 to $3.55 per diluted share. Specific to the second quarter of 2021, we expect global sales growth of 14% to 15% on a reported basis, 8% to 9% on a constant currency basis, and 7% to 8% on an operational basis. And we expect adjusted earnings excluding special items of $0.72 to $0.75 per diluted share. With that, we can now open up the call for Q&A.

Thank you. We will now begin the question and answer session. If you have a question, please press star then 1 on your touch tone phone. If you wish to remove yourself from the queue, press the pound key. If you are using a speaker phone, please lift the handset to ask your question. So that we may be respectful of everyone's time, please limit your comments to one question with one follow-up question if necessary. We appreciate everyone's patience and would like to provide as many of you as possible the opportunity to ask a question. We will pause for a moment while the list is being compiled. I would like to remind participants that the call is being recorded and a digital replay will be available on the Baxter International website for 60 days at www.baxter.com. Our first question comes from Robbie Marcus of JP Morgan. Your question, please.

Oh, great. Congrats on a good quarter, and thanks for taking the question. Thanks, Robbie. Thank you. Maybe to start it off, Jay, I'd love to get a little more color on the cadence that's assumed in your guidance here. Second quarter is coming in a touch below the street. But you did raise EPS guidance a little more than the first quarter beat. So I was hoping to get a sense of some of the items impacting second quarter. Is there still lag from high-cost inventory flowing through COGS, et cetera, and how to think about the margin expansion in the back half of the year?

JAY HARNESS- Sure. Robbie, consistent with how we outline performance at the beginning of the year, when we gave guidance originally, we really do see this as a tale of two different halves, with the shape of the second half being very different than the shape of the first half. In part, that relates to admissions and surgical procedures, and in part, it relates to certain manufacturing costs, which we expect to subside to the back part of the year. So first, as it relates to admissions, our second quarter assumption in admissions, you know, first quarter we saw about 8% down relative to pre-COVID levels. In the second quarter, we're expecting to see roughly 7% down. That's kind of the working assumption that we have in place. But in the back half of the year, we'll expect to see roughly 3% down. And so we do see a market improvement from first half to second half that benefits the top line. And then from the margin standpoint, we will see incremental improvements in the second half of the year, in particular with respect to gross margin that start to drive our performance up. And so, in fact, the second half average margin will be in the 20% range or a little bit north of that as implied by the guidance that we've shared. Now, specific to the second quarter, there are a few moving pieces. What I would say is we do have sequential improvement in sales that contributes approximately $0.10 of earnings impact roughly all in. And included in that is maybe a couple of cents related to the doxil acquisition. Now, but as we think about the second quarter, one of the things that's really important for us is setting the stage for a successful acceleration in the second half and setting the stage for a successful 2022. We are making meaningful OPEX investments in the second quarter to support that acceleration. So we're seeing roughly about $0.10 or so of OPEX investments that take place in the second quarter. And then from a financial statement standpoint, there's a tax rate. We see the tax rate from the first quarter to the second quarter tick up roughly $0.03. We saw a discrete item in the first quarter of the year. We don't expect that to repeat in the second quarter. Therefore, there's a bit of a tick up. So I think broadly speaking, you know, as you say, we're really pleased with the first quarter performance. It's a nice start to the year. It sets the stage for a successful performance throughout the rest of the year. But I view Q2 as a little bit more of a stage setter on the way to, you know, a really solid second half of the year.

That's great. Jay, I know I'm going to try and phrase this in a way that maybe you'll be able to answer it. I know we're going to get the full long-term guide this September, Analyst Day, but you're exiting the year with over a 20% operating margin. You're street-sitting at about 19.8% for next year. is there anything that would prevent us from taking the exit rate in the second half and bringing that through in the next year? So maybe you could just talk about maybe some puts and takes and what's in that second half margin. Is that a good go forward?

Thanks. So two things. One is stay tuned. We're really excited for our upcoming Investor Day. We're hopeful that we'll be able to conduct that in person with folks in attendance, and I believe it's going to be in the Deerfield area. So very excited to share. And at that point, we'll share some thoughts on 2022 and beyond in terms of where we can take the long-term platform of the business forward. And it's safe to say we as a team are incredibly focused on margin enhancements as we've been for the last five years. So there will definitely be some discussion of that. The one thing I would caution you is, you know, remember, we always have a seasonality factor in play. And Q1, Q2 are typically lower than Q3, Q4 for a whole host of reasons. But there is some seasonality that needs to be considered when you look at exit rates of Q4 margins, which typically are highest in the year.

Great. Thanks a lot.

Thank you.

Bob Hawkins of B of A Security is online with a question. Please state your question.

Yeah, great. Good morning, and thanks for taking the question. And I just wanted to follow up on Robbie's questions on operating margins, because I think it's a really important topic. So you're starting 2021 at 17%, and you mentioned what will happen over the course of the rest of the year, including the back half. How much of the trajectory over the course of the year is dependent on the improvement of revenue growth versus things that are kind of directly in your control on the manufacturing and cost side?

Bob, thanks for the question. It's a difficult question to answer because to some extent they do go hand in hand. Now, we have specific programs that we've earmarked on both the gross margin and the cost side. If you'll recall, in our last earnings call, we talked a little bit about the digital transformation that's underway, led by Andy Fry and Talvis, our CIO. We've got an enormous amount of work ongoing in terms of cost improvements and efficiency enhancements. um related to that transformation and also um jim borzy our head of manufacturing and operations has a lot in terms of accelerating operating performance in the second half of the year so all of those things will feature prominently as we look at q3 q4 and beyond but we do need you know as is always the case um if you're if you're falling short of revenue expectations It creates a real absorption challenge in the manufacturing facilities. It creates a real absorption challenge as you look at things like fixed SG&A and R&D costs. So there is some, you know, it's important that we do see the acceleration on the revenue line in order for us to deliver what our expectations are. Now, having said that, I do believe that, you know, we have the right revenue projection in place. And I think our ability to forecast revenues in light of this highly volatile environment has really improved, you know, quite substantially over the last 18 months. So, you know, I think the assumptions that I outlined that support the second half, you know, hopefully prove reasonable, but we'll have to wait and see.

Okay. Thank you for that. And then just a follow-up, actually, on operating margins, thinking a little long-term. know if you're starting if this year you end up successful and and we end up at around 18 and a half percent as you're guiding you know this the street model is roughly 100 basis point improvement in 2022 and 2023 and you know you'll give us all the specifics in september and i'm sure we're all looking forward to that but just you know directionally is there um you know are there things that we should be considering that would suggest that those numbers are our way off

You know, again, it's hard for us to comment in the context of we've taken the guidance off the table, and we did it because of a lot of different reasons. The guidance was stale. It was from 2018. We've had a global pandemic since we provided that guidance, and a lot of different things have happened. So what I can tell you is, and by the way, it's a little painful that we don't share anything because this team is committed to margin improvements. We focus a lot of our energy and efforts on it. And culturally, the notion of efficiency, enhancing the efficiency of our operations, that is center stage. And so for all of those reasons, you know, I'd love to share some commentary on future margins. But, you know, I think in light of the fact that you know, we still want to see how the pandemic plays out and are assumptions valid for the rest of this year and what happens to 2022. You know, in light of that, it's a little difficult, and I'll have to hold off on commenting on future years' margin performance.

Jay, if I just may ask Bob, we're not going to comment on the strict expectations. We'll do that in September. But what I want our listeners and investors to know is the company is really focused on margin improvement through a few levers. The first one is new product launches. This year we're launching more than 20 new products, including we're hopeful to obtain the 510K from the FDA on a new pump platform. Then we also have very good momentum in the integrated supply chain led by Jim Borzy. We also have Excuse me. The digital transformation that is touching every corner of the company with significant redesign of the finance function in the company and other functions in the company that will completely be redesigned and use of artificial intelligence and use of bots. So we have a lot of momentum going on. So we are not going to discuss a specific number, just telling folks that we're not just sitting here. We have a significant amount of work going on in Baxter to continue to improve our margins.

Thank you. Thanks, Bob.

Matt Miksik of Credit Suisse is on the line with a question. Please state your question. Emmett Missick with Credit Suisse. Your line is open. Please state your question. Hi.

Can you hear me okay?

Yes. Hi, Matt. How are you doing?

Thank you. I'm well, thanks. Thanks so much for taking the question. So, Jay, I had one that we've gotten over the last couple of months, I think, about Baxter and some of the comments that you've made and some of the comments that you've made today regarding projections on things like procedures and hospitalizations. And I know it's a challenge to make those kinds of projections given the variability in the environment and sort of the newness of this whole process that we're all going through. Can you help us understand a little bit how you get to some of the thoughts you have on first half, second half, and census levels, et cetera, and your visibility to those and sort of confidence as we kind of get into the year that we are going to wind up where you're describing and assuming in your guidance and have one follow-up?

Sure, and I will tell you that this is an area we have invested a lot in, and a lot of this work is done by our Americas team led by Giuseppe Acoli and Heather Knight. And it starts with aggregation of data sources. There are a number of proprietary data sources that we now have in place that really give us good line of sight to lie down in terms of actual patients admitted to hospitals along with surgical procedures. So we have a number of sources. And then, of course, there's a lot of publicly available sources. But early on in the pandemic, if we rewind over a year, we didn't have the availability of data sources for for information because, frankly, you know, this was hospital admissions was never a variable that was very concerning to us. It was always something that would grow a couple of single digits each year. And so in light of the Q2 last year where we saw a 20% decline, Giuseppe and team started spending a lot of their energy and effort assessing and understanding data sources. But then the second thing that we did was we started to do some work in terms of anticipating and forecasting with some artificial intelligence looking at a variety of data sources that could predict behavior. And ultimately, what we found is in the fourth quarter of last year, in the first quarter of this year, the model that we built, and I'm talking most specifically to the U.S. because I think that's a big driver for us, and it's also a discrete data set that lends itself to a level of analytics that perhaps other markets, it's a little more challenging. What we found was Q4, Q1, you know, we were largely in line with our expectations within a tolerance range that was acceptable. And so we've applied that same analytic lens looking forward. Now, we could be wrong, of course, and we've quantified in the past what a mistake would cost us from an admission standpoint. I believe one percentage point in the U.S., per month is a couple million bucks. And so that's sort of the penalty for being wrong. But I think, you know, I think throughout, once we got through Q2 of last year, our ability to anticipate what the outcome was going to be has been significantly better. And, you know, past performance is no guarantee of future performance. We have caveats related to forward-looking statements that Claire shared at the outset of this call. But I feel like we have done a nice job really assessing this and understanding drivers going forward. I don't know, Joe, if you'd like to add anything.

Jay, I think you've covered very well. Thank you. Thank you.

Yeah, that's super helpful. Uh, and then just one follow up on, on sort of your, your capacity and your focus on margins and efficiency. I know this is becoming a bit of a topic for the call, but it is important, uh, obviously. So, um, maybe if you could describe, you know, where, you know, the, the resources that you've put to work when, when you, when you came, uh, let's say in the couple of years leading up to, um, this pandemic. a fair amount of effort on zero-based budgeting and all sorts of operating efficiencies and rethinking of R&D spend, et cetera. I'm just wondering, you know, where is the flex in your organization to get after, get back after some of those opportunities, or how do you anticipate your organizations are shifting to get after sort of the next leg of margin opportunity coming out of the end of this year?

Mike, there are three very specific areas that we are very, very focused. One is integrated supply chain. from the moment we buy raw material, whatever raw material it is, all the way to deliver it to the customer. And we have the specifics of that. Coincidentally, I just revealed that yesterday with the team, we have programs in all areas, from cost of raw materials to the cost reductions in our manufacturing facilities, the ability to predict cost of logistics, which has been a headwind for the company and for many other companies around the globe, with containers and shipping lanes being clogged up. So those things are the focus of Baxter. And I saw the numbers yesterday. There's a progressive increase in net cost reduction of integrated supply chain that pleased me. The second thing is digital transformation, because Baxter did indeed remove costs from the G&A, but not enough. We got to a point that now we need to redesign our processes, so I just gave an example to supplement Bob's question to Jay, is finance organizations, a large group within the company, does a great job, but also we can do things in a much more concise and better way. So we're looking at that from digital transformation of our quality organizations, regulatory affairs, as well as the research and development. We shift research and development within the company. People ask me, why don't we spend more in research and development? Always we can spend more money. There's always opportunity to put more money. But we are now, this year, piping out 22 new products. a brand new platform of bumps that this company never had the capability to develop, and we're doing this with the R&D resources that we have by shifting location of labor, but also becoming more effective in doing that. And lastly is the mix of this new product that will come into play for the margin accretion. So there is opportunity in GNA and gross margin via reduction in cost from integrated supply chain as well as the mix due to new products.

Very helpful, Collier. Thanks, Joe.

Chikering of Deutsche Bank is online with a question. Please state your question.

Good morning, guys. Thanks for taking my questions. The first one is a follow-up on the cadence question, but focusing on revenues versus the effects of your spending in 2Q. January and February were top for most of the country due to COVID surge and the storms. But can you give us some color on the X rates in March and maybe April that you're seeing within medication delivery, advanced surgery, and acute therapies? I'm trying to understand the dynamics of the COVID tailwinds and headwinds as you head into 2Q.

Sure. So overall, I think what we outlined was admissions Q1 down roughly 8% on the way to 7% in Q2, and that very much has an impact on our medication delivery business and the performance there. And then I didn't mention this, but from a surgery standpoint, You know, we saw it down kind of low single digits, maybe 4% in the first quarter. We're expecting to see a sequential improvement to the second quarter of the year, maybe down 2%. And my comments are specifically related to the United States. And our April trends, what we've seen thus far, is, broadly speaking, supportive of the comments that I've made. Now, having said that, you know, for all the reasons that you know well, Peto, the second quarter of the year represents – a very, very easy comp for areas like medication delivery. So whereas in the U.S. and globally we saw a decline in the first quarter of the year, we expect to see a fairly reasonable growth level in the second quarter of the year in large part because of the easy comp and then some of the easing that we're seeing from an admissions standpoint.

Okay, and then for renal care, can you give us some more color on what you're seeing within the U.S., Europe, and other markets? I believe you mentioned that Lactam was down in mid-teens. How do you think about the increased mortality on the ESRD patients as it relates to both their in-center products and your PD products within those geographies in 2021? And also, have you seen increased PD demand as patients would rather be at home versus center? And how do patients get vaccinated? Are they keeping on PD?

Yeah. You know, this is Joe Almeida. So I would say that we saw a decline in census just as was outlined by the providers and by us before there was a significant death that caused patients off therapy. But when we look at the dynamics of the market, we still see the U.S., the P.B., PD patient growth, even with that in the U.S., was 3.3%. And the outlook for the year is 6%. The issue that was dampened, the number overall, is significant reduction in Latin American patient census, primarily in Mexico, some in Brazil as well, due to fatalities due to COVID-19. and also a reduction in census until once COVID hit in Europe. Europe was starting to recover and start to gain really good momentum until COVID hit. So we are optimistic even for PD this year, different than HD, 6.1% outlook. for the year. And the dynamics are correct to your point. A PD is shown to be a home therapy that in crisis like a pandemic shows an increased value of convenience and safety for the patient by staying home instead of having to travel to the clinic. And I think, I believe that the ESRD disease state in the U.S. with the changes in guidance for home therapists, you're going to continue to see this therapy gaining momentum. So even though we had COVID in the beginning of the year affecting heavily a lot of areas in the U.S., we still see good growth going forward. Thank you.

Great, thanks so much.

Lawrence Beagleson of Wells Fargo is on the line with a question. Please state your question.

Good morning. Thanks for taking the question. One on Novum IQ, one on BPS. Joe, on Novum IQ, just, you know, what's your confidence in that second half 2021 approval? Is it still the three 510 case that you filed last year? And, you know, what's in the 2021 guidance? And I had one follow up.

Larry, thanks for asking me questions. I was starting to feel a little lack of love here. You know, Peter and you are the only ones asking me questions, so I'm happy I'm back on the call again. So we believe Nova MyQ. What we did is we clarify a lot of questions. It made a much better application for the Novum IQ. So remember, Novum IQ is a platform. So we launched, we have three products that are in this 510K. We still have two or three more products that will come down the pack towards the end of the year. Our PCA pump. We also have ambulatory pumping and another accessory. So when we look at this market, we don't, first of all, speak on behalf of the FDA. We are very happy with the way we operate. put together the 510K application for the FDA, but that doesn't mean that we speak on behalf of the FDA. The FDA will do what the FDA has to do. When they're ready and if they approve, we have some sales in the second half of the year, modest, but we have some. I don't know if Jay wants to give a bit more call on that.

Joe, in terms of sales guidance, we do have sales included for Novum IQ in the second half. It's sort of north of $30 million, but it's nothing. It's sort of similar to levels that we had expected last year.

That's helpful. Joe, I'll continue to give you more love here on BPS. Why break that out now? Is this a strategic business for Baxter? So high-level thoughts on it and just more near-term, the COVID vaccine opportunity is still $50 million to $100 million on an annual basis. But you also have that other $50 million investment in November 2020 that I think is not related to COVID vaccine. So just talk about, you know, why breaking it out now and the kind of near-term opportunities. You seem to have, you know, quite a few tailwinds in that business. Thanks for taking the questions.

Larry, I will speak, but I'll open also for Jay to chime in on this. We did, for management purpose, we did this because it's the way we manage the business. One's always in the other, and there's a large number in others, so we prefer to have that separate. Jay, any more color on the reason?

No, that's exactly right. It's an important business unit for us, one that we focused on, made some investments in, and I think it really does leverage numerous core competencies of Baxter. It was hiding in this other category, so we wanted to take the opportunity to shed the light on it and allow investors to see specific performance for this without being clouded by other items.

And Larry, our guidance has $50 to $100 million possibility in it for incremental vaccine for 2021, so we'll stay with that number. We made investments in BPS. We have two facilities, one in Europe, one in the US, that are benefiting from some of these investments. And we believe that that's the right place to create capabilities. We have unique capabilities there. We do a very good job. We have very happy customers. So we believe that it's a good profit margin for the companies that credit to Baxter overall. And it takes very little SG&A to run. So we have a really good technical group. is a good business, good customer reputation, so why not invest more and benefit from such capability we have in-house? Thank you very much.

Joanne Wash of Citi is online with a question. Please state your question.

Good morning, and thank you for taking the questions. I have two. The first one is it seems like there were a couple of ebbs and flows from COVID-19 in the quarter. If you could just pull those apart a little bit more. And then also, similarly, there looks like there are a number of drivers to the increased guidance for the year. If you could just sort of, you know, highlight what those may or may not be. Thanks.

Sure, sure. Maybe I'll start with these, Joe, and then you can chime in. And I'll answer your second question first in relation to puts and takes with respect to the full-year guidance. Overall, if we take the full year and disregard the quarters for a moment, the strong operational performance that we've seen from a sales standpoint, plus some incremental vaccines adds roughly $0.10 to our overall guidance. In addition to that, we have some OPEX savings that's about $0.04. But one of the things that we highlighted in the script was the supply chain cost that we've seen in the short term. And really, you know, with the highly volatile environment from a global logistics market standpoint, from a raw materials pricing standpoint, resin prices, some of this impacted by the freeze in Texas, some of this impacted by the global supply chain challenges. along with Suez Canal, we are expecting a fairly substantial increase in supply chain costs related to those discrete items. And that really eats up the vast majority of those upsides that I characterized a little bit ago. And then, in addition, we've added the Doxil acquisition. That's a little north of $0.10 in terms of full-year impact. FX and other items, all that stuff kind of washes on a full-year basis, although we do see some movement amongst quarters. the overall drivers of the full year performance and what i would say is you know very excited about the strong operational performance um very mindful of the current environment that we're faced with with respect to shipping and container costs resin costs etc we do expect that will alleviate over time but we've tried to put the right projections in given the acute situation that we've seen over the last several months and we anticipate for at least the next several months

And Joanne, I'll take the first part of your question, which was on the impact of COVID in the quarter. So if you recall, last year in the first quarter, we had about 45 to 50 million of a benefit from COVID-related purchases as hospitals prepared for the pandemic. So we had about 45 to 50 million of that. Now, this quarter, it negatively impacted sales by north of 50 million. So that's why we called out about a 400 basis point impact on our growth this year, this quarter from COVID. Now, again, we saw positive benefits in our acute therapies. We saw some vaccine-related revenues in our BPS. But then in general, across the remainder of the businesses, we saw a negative impact from COVID during the quarter. So hopefully that addresses your question.

Thank you.

Matt Taylor of UBS is online with a question. Please state your question. Hi.

Thank you for taking the question. So I wanted to just ask one about the acute therapy business. It's growth has continued to be really strong, as you called out the demand for CRT. How long do you expect that to persist? I know you're saying it can go down over the course of the year. Do you still think there's a strong quarter or two, or do you expect a big fall off here in the second quarter?

Matt, we still see COVID unfortunately raging across the globe. I think you have two things going on. One is we do have this therapy more being expanded and understood across the globe, even more than once before, its benefits. Second, you have countries which still have issues. You can still see demand coming in. And even in the United States, you still have a good number of people, unfortunately, being treated with this technology because COVID. But we expect that to tame down. This is a high single digit, sometimes very low double digit growth. as a technology, as a product line. And we expect to see a reduction of the current levels to what's more normal, which is high single digits as time goes by this year into next year.

Yeah, and Matt, just to add to that, we... You know, we will see declines because of the very substantial comp issues in Q2 and Q3. So, you know, we'll see a decline starting in Q2. And to Joe's point, this is a solid high single-digit growth engine for us. That's kind of how we view it. But the peculiarities of this year, despite continued COVID demand in the second quarter, you know, we saw just an unbelievable, unprecedented level of demand in Q2 and Q3 of last year. So it does lead to declines. Gotcha. Gotcha.

Can I just ask one on the in-life? It seems like a nice little pickup for you. And, you know, in the context of you also investing in biopharma solutions, You've got like two sides of the house, right, pharma and device, kind of broadly speaking. Maybe just talk about strategically how you see those sitting together, and are we going to see more on the pharma side, or is it just that the last couple increases in investments have been there?

Matt, we do have two sides of the house, but they're very connected. The way we go to market, the way we understand contracts, and our devices also are devices that are becoming more intelligent, but they're transporting fluid from point A to the body. So the combination of our devices and our injectables and pharmaceuticals come together. When we look at business development, we look at business development across the spectrum of Baxter, what is the objective of business development is to extend into adjacencies, short out for our core, and sometimes go away from the adjacencies into an area that may benefit the company in the future. Always, always with the thinking, where is the puck? going, right, instead of going at the top where it is today. So that's our philosophy in M&A. You're going to continue to see the tuck-ins because those are good for the company, leverage our sales and marketing organizations as well as our manufacturing groups. So these two tachyons were very beneficial. One, primarily calyx version of doxil in Europe helped us create a structure to add more pharmaceuticals organically and inorganically there. So our philosophy is always enforce organic. and make the core stronger, going to adjacent and also look where the fuck is going healthcare and make sure that we don't miss that trend. Great. Thanks. That's a helpful insight. Thanks, Joe.

BJ Kumar of Evercore ISI is on the line with a question. Please state your question.

Hey, guys, congrats and a nice start here. Maybe I'll start one on the guidance and the positives of what has been asked. Jay, I guess you beat the quarter, right? The expectation was for low signal declines, constant currency, you guys came in up low signals. And if I understand the annual guide correctly, the constant currency guide raise was mostly a function of KLX. So I guess my question is, is the underlying business coming in better than expectations since you won? Why wouldn't that flow through in the back half?

Sure, Vijay. We did see a little bit of operational strength in the first quarter, and some of that relates to slightly better admissions than we experienced in the – than we had originally modeled. And so, as a result, we did see, you know, a little bit better performance in the first quarter. But, you know, given where we are in the year, given some of the challenges that the renal patient census is faced with at this point, it's a little difficult to, you know, call full year strength at this stage. We'll have to continue to watch. If the renal patient census stabilizes, if admissions and surgical procedures come in line or better than what we've modeled, we'll certainly update. But at this point in time, I think we've got a reasonable guidance for the balance of the year. Understood.

Then, Joe, one for you, mostly around capital deployment. I wasn't sure if you guys bought back any stock in the quarter, but the larger question around M&A philosophy, maybe, you know, could you just recap for us on how your thought process around M&A has changed, if it has, over the past few months?

DJ, good to hear from you. How are you doing? Thank you. So the philosophy in how we are disciplined about how you deploy cash has not changed. As I actually answered a little bit of your question before, we will continue to look for tuck-ins in our core businesses. Not very easy to find them because the size of our businesses and the particularity of our businesses, but we'll continue. We just did a couple of small ones in the pharmaceuticals business. We'll continue to look for those opportunities. We're going to adjacencies. We're looking at things to shore up where we can have But more importantly, also, we're starting to look at the healthcare theater in general and trying to anticipate with what we saw last year and how healthcare is moving and the direction it's moving. So where should Baxter go? And we always talk about intelligent devices. We always talk about the integration with the hospital systems, with the deployment of our own gateway for the new pumps. So if you think about how do you participate where actually the puck is going, not the puck is today, so the company can revitalize itself as well. So these are all areas that we look at. We're very eager to continue to explore opportunities. But as I always say, if we do not find the right opportunity, we're not going to sit on cash and have cash burn a hole in our pockets. We will bring the, you know, either share buyback as well as increase in dividends.

Thanks, guys. And Vijay, we purchased approximately $300 million in shares in the quarter.

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call with Baxter International. Thank you for participating. You may now disconnect.